Greek Govt Report: The Truth Committee on Public Debt (Debt Truth Committee)

8/21/2019 Greek Govt Report: The Truth Committee on Public Debt (Debt Truth Committee)

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Preliminary report


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The Truth Committee on Public Debt (Debt Truth Committee) was established onApril 4, 2015, by a decision of the President of the Hellenic Parliament, Ms ZoeKonstantopoulou, who confided the Scientific Coordination of its work to Dr. EricToussaint and the cooperation of the Committee with the European Parliament andother Parliaments and international organizations to MEP Ms Sofia Sakorafa.

Members of the Committee have convened in public and closed sessions, to producethis preliminary report, under the supervision of the scientific coordinator and withthe cooperation and input of other members of the Committee, as well as expertsand contributors.

The preliminary report chapterswere coordinated by:

Bantekas Ilias

Contargyris Thanos

Fattorelli Maria Lucia

Husson Michel

Laskaridis Christina

Marchetos Spyros

Onaran Ozlem

Tombazos Stavros

Vatikiotis Leonidas

Vivien Renaud

With contributions from:

Aktypis Héraclès

Albarracin Daniel

Bonfond Olivier

Borja Diego

Cutillas Sergi

Gonçalves Alves Raphaël

Goutziomitros Fotis

Kasimatis Giorgos

Kazakos Aris

Lumina Cephas

Mitralias Sonia

Saurin Patrick

Sklias Pantelis

Spanou DespoinaStromblos Nikos

Tzitzikou Sofia

The authors are grateful for the advice andinput received from other members of theTruth Committee on Public Debt as well as otherexperts, who contributed to the Committee’s workduring the public sessions and hearingsand the closed or informal consultations.

The authors are gratefulfor the valuable assistance of

Arnaoutis Petros Konstantinos, AronisCharalambos, Bama Claudia, Karageorgiou Louiza,Makrygianni Antigoni and Papaioannou Stavros


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Executive Summary

In June 2015 Greece stands at a crossroads ofchoosing between furthering the failed macroe-conomic adjustment programmemes imposed bythe creditors or making a real change to break

the chains of debt. Five years since the economic adjustment programmemes began, the country remainsdeeply cemented in an economic, social, democraticand ecological crisis. The black box of debt has re-mained closed, and until a few months ago no author-ity, Greek or international, had sought to bring to lightthe truth about how and why Greece was subjectedto the Troika regime. The debt, in the name of whichnothing has been spared, remains the rule throughwhich neoliberal adjustment is imposed, and thedeepest and longest recession experienced in Europeduring peacetime.

There is an immediate democratic need and socialresponsibility to address a range of legal, social andeconomic issues that demand proper consideration.In response, the President of the Hellenic Parliamentestablished the Truth Committee on Public Debt(Debt Truth Committee) in April 2015, mandating theinvestigation into the creation and the increase ofpublic debt, the way and reasons for which debt wascontracted, and the impact that the conditionalities

attached to the loans have had on the economy andthe population. The Truth Committee has a mandateto raise awareness of issues pertaining to the Greekdebt, both domestically and internationally, and toformulate arguments and options concerning thecancellation of the debt.

The research of the Committee presented in thispreliminary report sheds light on the fact that theentire adjustment programmeme, to which Greecehas been subjugated, was and remains a politicallyorientated programmeme. The technical exercisesurrounding macroeconomic variables and debt pro-

jections, gures directl relating to people’s lies and

livelihoods, has enabled discussions around the debtto remain at a technical level mainly revolving aroundthe argument that the policies imposed on Greece will

improve its capacity to pay the debt back. The factspresented in this report challenge this argument.

All the evidence we present in this report showsthat Greece not only does not have the ability to paythis debt, but also should not pa this debt rst andforemost because the debt emerging from the Troi-a’s arrangements is a direct infringement on the fun-damental human rights of the residents of Greece.Hence, we came to the conclusion that Greece shouldnot pay this debt because it is illegal, illegitimate, andodious.

It has also come to the understanding of the Com-

mittee that the unsustainability of the Greek publicdebt was evident from the outset to the internationalcreditors, the Greek authorities, and the corporatemedia. Yet, the Greek authorities, together with someother governments in the EU, conspired against therestructuring of public debt in 2010 in order to pro-tect nancial institutions. The corporate media hidthe truth from the public by depicting a situation inwhich the bailout was argued to benet Greece, whilstspinning a narrative intended to portray the popula-tion as deservers of their own wrongdoings.

Bailout funds provided in both programmemes of2010 and 2012 have been externally managed through

complicated schemes, preenting an scal autono-my. The use of the bailout money is strictly dictatedby the creditors, and so, it is revealing that less than10% of these funds have been destined to the gov-ernment’s current expenditure.

This preliminary report presents a primary map-ping out of the key problems and issues associatedwith the public debt, and notes key legal violationsassociated with the contracting of the debt; it alsotraces out the legal foundations, on which unilateralsuspension of the debt payments can be based. Thendings are presented in nine chapters structured asfollows:

Chapter 1, Debt before the Troika, analysesthe growth of the Greek public debt since the 1980s. It


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concludes that the increase in debt was not due to ex-

cessive public spending, which in fact remained lowerthan the public spending of other Eurozone countries,but rather due to the payment of extremely high ratesof interest to creditors, excessie and unjustied mili-tary spending, loss of tax revenues due to illicit capitaloutows, state recapitalization of priate bans, andthe international imbalances created ia the awsin the design of the Monetary Union itself. Adoptingthe euro led to a drastic increase of private debt inGreece to which major European private banks as wellas the Greek banks were exposed. A growing bankingcrisis contributed to the Greek sovereign debt crisis.George Papandreou’s goernment helped to presentthe elements of a banking crisis as a sovereign debtcrisis in 2009 by emphasizing and boosting the publicdecit and debt.

Chapter 2, Evolution of Greek public debtduring 2010-2015, concludes that the rst loanagreement of 2010, aimed primarily to rescue theGreek and other European private banks, and to allowthe banks to reduce their exposure to Greek govern-ment bonds.

Chapter 3, Greek public debt by creditorin 2015, presents the contentious nature of Greece’s

current debt, delineating the loans’ e characteris-tics, which are further analysed in Chapter 8.

Chapter 4, Debt System Mechanism inGreece reveals the mechanisms devised by the agree-ments that were implemented since May 2010. Theycreated a substantial amount of new debt to bilateralcreditors and the European Financial Stability Fund(EFSF), whilst generating abusive costs thus deepen-ing the crisis further. The mechanisms disclose howthe majority of borrowed funds were transferred di-rectl to nancial institutions. Rather than benettingGreece, they have accelerated the privatization pro-cess, through the use of nancial instruments.

Chapter 5, Conditionalities against sustain-ability, presents how the creditors imposed intru-sive conditionalities attached to the loan agreements,which led directly to the economic unviability and un-sustainability of debt. These conditionalities, on whichthe creditors still insist, have not only contributed tolower GDP as well as higher public borrowing, hencea higher public debt/GDP maing Greece’s debt moreunsustainable, but also engineered dramatic changesin the society, and caused a humanitarian crisis. TheGreek public debt can be considered as totally unsus-tainable at present.

Chapter 6, Impact of the “bailout pro-grammes” on human rights, concludes that themeasures implemented under the “bailout pro-

grammes” hae directl aected liing conditions of

the people and violated human rights, which Greeceand its partners are obliged to respect, protect andpromote under domestic, regional and internationallaw. The drastic adjustments, imposed on the Greekeconomy and society as a whole, have brought abouta rapid deterioration of living standards, and remainincompatible with social justice, social cohesion, de-mocracy and human rights.

Chapter 7, Legal issues surrounding theMOU and Loan Agreements, argues there has beena breach of human rights obligations on the part ofGreece itself and the lenders, that is the Euro Area

(Lender) Member States, the European Commission,the European Central Bank, and the InternationalMonetary Fund, who imposed these measures onGreece. All these actors failed to assess the humanrights violations as an outcome of the policies theyobliged Greece to pursue, and also directly violatedthe Gree constitution b eectiel stripping Greeceof most of its sovereign rights. The agreements con-tain abusie clauses, eectiel coercing Greece tosurrender signicant aspects of its soereignt. Thisis imprinted in the choice of the English law as gov-erning law for those agreements, which facilitatedthe circumvention of the Greek Constitution and in-

ternational human rights obligations. Conicts withhuman rights and customary obligations, several in-dications of contracting parties acting in bad faith,which together with the unconscionable character ofthe agreements, render these agreements invalid.

Chapter 8, Assessment of the Debts asregards illegtimacy, odiousness, illegality, and un-sustainability, provides an assessment of the Greekpublic debt according to the denitions regardingillegitimate, odious, illegal, and unsustainable debtadopted by the Committee.

Chapter 8 concludes that the Greek public debt as

of June 2015 is unsustainable, since Greece is cur-rently unable to service its debt without seriouslyimpairing its capacit to fulll its basic human rightsobligations. Furthermore, for each creditor, the reportprovides evidence of indicative cases of illegal, illegit-imate and odious debts.

Debt to the IMF should be considered illegal sinceits concession breached the IMF’s own statutes, andits conditions breached the Greek Constitution, inter-national customary law, and treaties to which Greeceis a party. It is also illegitimate, since conditionsincluded policy prescriptions that infringed humanrights obligations. Finally, it is odious since the IMFknew that the imposed measures were undemocratic,ineectie, and would lead to serious iolations ofsocio-economic rights.


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Debts to the ECB should be considered illegal since

the ECB over-stepped its mandate by imposing the ap-plication of macroeconomic adjustment programmes(e.g. labour market deregulation) via its participationin the Troika. Debts to the ECB are also illegitimateand odious, since the principal raison d’etre of theSecurities Market Programmeme (SMP) was to servethe interests of the nancial institutions, allowing themajor European and Greek private banks to disposeof their Greek bonds.

The EFSF engages in cash-less loans which shouldbe considered illegal because Article 122(2) of theTreaty on the Functioning of the European Union(TFEU) was violated, and further they breach severalsocio-economic rights and civil liberties. Moreover,the EFSF Framework Agreement 2010 and the MasterFinancial Assistance Agreement of 2012 contain sev-eral abusive clauses revealing clear misconduct on thepart of the lender. The EFSF also acts against dem-ocratic principles, rendering these particular debtsillegitimate and odious.

The bilateral loans should be considered illegalsince they violate the procedure provided by the Greekconstitution. The loans involved clear misconduct bythe lenders, and had conditions that contravened lawor public policy. Both EU law and international law

were breached in order to sideline human rights inthe design of the macroeconomic programmes. Thebilateral loans are furthermore illegitimate, since theywere not used for the benet of the population, butmerely enabled the private creditors of Greece to bebailed out. Finally, the bilateral loans are odious sincethe lender states and the European Commission knewof potential violations, but in 2010 and 2012 avoided toassess the human rights impacts of the macroeconomicadjustment and scal consolidation that were the con-ditions for the loans.

The debt to private creditors should be consideredillegal because private banks conducted themselves ir-

responsibly before the Troika came into being, failingto observe due diligence, while some private creditorssuch as hedge funds also acted in bad faith. Parts ofthe debts to private banks and hedge funds are illegiti-mate for the same reasons that they are illegal; further-more, Greek banks were illegitimately recapitalized bytax-payers. Debts to private banks and hedge funds areodious, since major private creditors were aware thatthese debts were not incurred in the best interests ofthe population but rather for their own benet.

The report comes to a close with some practical con-siderations.

Chapter 9, Legal foundations for repudiation

and suspension of the Greek sovereign debt , pre-sents the options concerning the cancellation of debt,and especially the conditions under which a sovereign

state can exercise the right to unilateral act of repu-

diation or suspension of the payment of debt underinternational law.

Several legal arguments permit a State to unilater-ally repudiate its illegal, odious, and illegitimate debt. Inthe Greek case, such a unilateral act may be based onthe following arguments: the bad faith of the creditorsthat pushed Greece to violate national law and interna-tional obligations related to human rights; preeminenceof human rights over agreements such as those signedby previous governments with creditors or the Troika;coercion; unfair terms agrantl iolating Gree so-ereignt and iolating the Constitution; and nall, the

right recognized in international law for a State to takecountermeasures against illegal acts by its creditors,which purposefull damage its scal soereignt, obligeit to assume odious, illegal and illegitimate debt, violateeconomic self-determination and fundamental humanrights. As far as unsustainable debt is concerned, everystate is legally entitled to invoke necessity in excep-tional situations in order to safeguard those essentialinterests threatened by a grave and imminent peril. Insuch a situation, the State may be dispensed from thefullment of those international obligations that aug-ment the peril, as is the case with outstanding loancontracts. Finally, states have the right to declare them-

selves unilaterally insolvent where the servicing of theirdebt is unsustainable, in which case they commit nowrongful act and hence bear no liability.

People’s dignit is worth more than illegal, illegiti-mate, odious and unsustainable debt

Having concluded its preliminary investigation, theCommittee considers that Greece has been and still isthe victim of an attack premeditated and organized bythe International Monetary Fund, the European CentralBank, and the European Commission. This violent, ille-gal, and immoral mission aimed exclusiel at shiingprivate debt onto the public sector.

Making this preliminary report available to the

Greek authorities and the Greek people, the Commit-tee considers to hae fullled the rst part of its mis-sion as dened in the decision of the President of theHellenic Parliament of 4 April 2015. The Committeehopes that the report will be a useful tool for thosewho want to exit the destructive logic of austerity andstand up for what is endangered today: human rights,democrac, peoples’ dignit, and the future of gener-ations to come.

In response to those who impose unjust measures,the Greek people might invoke what Thucydides men-

tioned about the constitution of the Athenian people: “Asfor the name, it is called a democracy, for the adminis-

tration is run with a view to the interests of the many,

not of the few” (Pericles’ Funeral Oration, in the speechfrom Thucdides’ Histor of the Peloponnesian War).


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7 Introduction

8The work of the TruthCommittee in Public Debt

10Definition of termsand acronyms

11Chapter 1: Debtbefore the Troika

17Chapter 2: Evolution of the Greekpublic debt during 2010-2015

22Chapter 3: Greek public debtby creditor in 2015

29Chapter 4: Debtmechanism in Greece

33 Chapter 5: The conditionalitiesagainst sustainability

37Chapter 6: The impact of the “bailoutprogramme” on human rights

45Chapter 7: Legal issues surroundingthe MOU and Loan Agreements

51Chapter 8: Assessment of the debt as regardsillegitimacy, odiousness, illegality and unsustainability

57Chapter 9: Legal foundations for repudiation

and suspension of Greek sovereign debt

Contents


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Since May 2010, Greece has been imple-menting a macroeconomic adjustment pro-

gramme as a condition for accessing “-nancial assistance” from the InternationalMonetary Fund, fourteen eurozone Member statesrepresented by the European Commission, the Eu-ropean Financial Stability Facility, and the EuropeanCentral Bank. The programme consists of neoliberalpolicy measures that involve deep spending and jobcuts in the public sector, extended deregulation of theprivate sector, tax increases, privatizations, and struc-tural changes (misleadingly called “reforms”).

These internationally imposed measures, suppos-edl aimed at reducing the countr’s budget decitand public debt to sustainable levels, have pushed the

economy into a deep recession - the longest recessionexperienced in Europe during a period of peace. Millionswere thrown into poverty, unemployment, and socialexclusion, while human rights, particularly econom-ic and social rights, were grossly undermined. Publicservices and infrastructure such as schools, hospitals,courts, and municipalities around the country have beenmerged, shut-down, or otherwise suocated, in orderto achiee scal targets specied b the creditors thathave been widely criticized as unacceptable and unreal-istic. Human lives, the social fabric, the state structure,and the natural enironment suered wounds that willtake a long time to heal, or are irreversible, as is the

case for those who lost or took their own lives duringthe memoranda period, when the suicide rate rose tounprecedented levels.

In response to this situation, and within the frame-wor of the Parliament’s responsibilit to the Greepeople, on 4 April 2015, the President of the HellenicParliament decided to establish a Special Committeeof the Hellenic Parliament. The Truth Committee onPublic Debt, or Debt Truth Committee, was given themandate to investigate the truth about the creationand the intolerable increase of the public debt, as wellas to audit the debt, and to promote the internationalcooperation of the Hellenic Parliament with the Euro-

pean Parliament and the Parliaments of other coun-tries, as well as with International Organizations, inmatters of debt. The Committee aims to address the

full range of legal, social, and economic issues thatdemand proper consideration in relation to the debt,

and also to raise awareness among Greek citizens,the international community, and international publicopinion.

This preliminary report, available in Greek and Eng-lish, presents the main ndings of the Committee in therst phase of its wor. It is expected that the ndingsof the Committee will raise issues that will be furtheranalysed and investigated in the second phase, overthe course of the ear ahead. The ndings presentedhere are preliminary and as the Committee continuesits proceedings, the analysis is expected to be furthercorroborated, articulated and rened.

The primary aim of this preliminary report is to high-

light e areas of contention, and to dene specic is-sues that need to be brought into public consideration.

Aer this introductor section, which presents thecontext and methodology of our analysis as well as thedenitions of illegal, illegitimate, odious, and unsus-tainable debt, the rest of the report is structured asfollows. Chapters 1 and 2 examine the development ofthe Greek public debt between 1980 and 2015. Chap-ter 3 traces key characteristics of the current credi-tors of Greece. Chapter 4 presents a summary of thedebt mechanisms related to the agreements signed byGreece and the Troika since 2010. Chapters 5 and 6 an-alyse the conditionalities attached to the loan facility

and other agreements, as well as their impact on thesustainability of debt from both a human rights and amacroeconomic perspective. Chapter 7 proceeds to thelegal issues regarding the Memoranda of Understand-ing and the Loan Agreements, and examines how theywere developed and adopted. Chapter 8 provides anassessment of the Gree public debt based on the de-nitions of illegitimate, odious, illegal, and unsustainabledebt as adopted by the Committee during its PlenarySession of Ma 4-7th, 2015. Finall, aer this analsisof the multifaceted issues related to the Greek publicdebt, Chapter 9 concludes and presents the optionsconcerning the cancellation of debt, and especially the

conditions under which a sovereign state can exercisethe right to unilateral repudiation or suspension ofpayment of debt under international law.

Introduction


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Context

The decision to create the Truth Committee and re-alize an audit of the Gree public debt is justied forthree main reasons.

First, the audit of the public debt is a basic demo-cratic right of citizens as well as a sovereign right of anation. There can be no democracy without transpar-

enc regarding state nances, and it is immoral to ascitizens to pay for debt without knowing how and whythis debt was created. It is also very important to auditthe debt because substantial sacrices are demand-ed from and/or imposed on the Greek society and theGreek state in order to honour the payment of debt.

Second, debt audit is also an institutional duty ofthe State according to European law. It responds to

the obligation created b Regulation(EU) No. 472/2013 of the Eu-

ropean Parliament andof the Council on 21

May 2013, which

enjoins a Mem-ber State subject to a mac-

roeconomicadjustmentprogrammeto “carryout a com-prehensiveaudit of its

public nanc-es in order,

inter alia, to as-

sess the reasonsthat led to the build-

up of excessive levels ofdebt as well as to track any

possible irregularity” (Paragraph9 of Article 7). This obligation was entirely neglectedby the previous Greek governments and the Troika in-stitutions.

Third, debt audit is also an obligation stemming frominternational law. The United Nations Guiding Princi-ples on Foreign Debt and Human Rights (A/HRC/20/23),adopted b the UN Human Rights Council in Jul 2012,calls upon States to undertake periodic audits of their

public debt, in order to ensure transparency and ac-countability in the management of their resources, andalso to inform future borrowing decisions.

A central objective of the Truth Committee on Pub-

lic Debt is to respond to the United Nations call for

transparency and accountability in the management ofresources. Another objective is to explain to the Greek

people how and why the debt, whose onerous repay-

ment has been demanded from them during the laste ears, was created and managed.

Composition of the Truth Committee

on Public DebtThe Truth Committee on Public Debt is an independ-

ent Committee, created by the President of the Hellen-ic Parliament under a Regulation thereof. It is chairedby the President of the Hellenic Parliament, Zoe Kon-stantopoulou, its scientic coordinator, Professor EricToussaint and MEP Soa Saorafa, responsible for itsrelations with the European Parliament and other Par-liaments and Institutions. It comprises members from

Greece and ten other countries. Most have internation-

ally recognized competence, expertise and experience inthe subject matters of audit, public debt, human rights

protection, international law, constitutional law, inter-national nance, macroeconomics, anti-corruption andtransparency guarantees; others contribute the rich

and precious experience of local or international social

movements. The Committee also receives the cooper-ation of experts and authorities, as well as of Parlia-

ment services and society at large. The work of the

Committee is open to society and to those who wish tocontribute as experts, witnesses, sources, or members.Indeed, during the rst two months of the Committee’swor, there hae been considerable oers of contribu-tion, which have been or will be taken into account. Themembers of the Committee oer their wor ex gratia ,

and they did not, do not, and will not receive any remu-neration for their work.

Mandate and Objectives of

the Truth Committee on Public Debt

The Truth Committee was given the mandate to ex-

amine the nature of Greek public debt, as well as thehistorical, nancial, and other processes related to thecontracting and accumulation of debt; also to identifywhat part or proportion of the debt can be dened asillegitimate, illegal, odious, or unsustainable.

The Truth Committee designs the debt audit in a

manner conducive to enhancing transparency and ac-countabilit in the management of Gree public nanc-es. It also formulates arguments and traces the legal

foundations concerning the cancellation of the debt.

The Work of the TruthCommittee on Public Debt


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Limitations

During the rst two months of their wor, the mem-bers of the Truth Committee worked intensively in orderto carry out the analysis of public debt and present thepreliminary conclusions in this report. However, thistime frame is not sucient to full analse the mech -anisms of debt accumulation in Greece for the wholeperiod from 1980 to 2015. Therefore, the Truth Com-mittee had to prioritise the issues and in particular theperiods to be examined as a matter of urgency.

Furthermore, the Truth Committee has not yet re-ceied all the legal and ocial documents that arenecessar to corroborate its ndings and analze allaspects of the Greek debt; it also takes note of the factthat, in an initial answer to the Committee, the Bankof Greece, through its Director, refused to transmitdocuments, which are essential to the audit. The Com-mittee will insist that these documents (namely banktransactions concerning the loan agreements) are dulytransmitted to it. In the coming months, we expect to

enjoy the full collaboration of the Greek institutions in-volved in the administration of public debt, especially inproviding all legal documents, data, and accountabilityregisters which will help us to complete the audit andaccountability procedures.

Nevertheless, the work carried out by the Truth Com-mittee to date allows us to present some importantpreliminar ndings and polic implications. These pre-liminar ndings shed new light on issues of debt, anddemonstrate the importance of further investigationsand audit procedures. Therefore, the Committee willcontinue pursuing its work during the coming months,and is expected to present its nal report b Ma 2016.

The time frame of analysis

One of the goals of the Truth Committee is to pres-ent a complete overview of the evolution of the Greekpublic debt from 1980 to 2015, accompanied by an anal-ysis of the trends, processes, and operating cycles ofthe transactions that gave rise to such liabilities, thatcan be reached through the procedures of a debt audit.Gien the time limitations, in the rst phase of the auditthe Truth Committee prioritized the examination of theMemoranda period from May 2010 until January 2015in this preliminary report of 17-18 June 2015.

The institutions and procedures that came to the

fore in the Memoranda Period did not appear ex nihilo.Our preliminar analses of the period from 1980 to2010, concerning in particular certain incidents of con-spicuous corruption, which burdened the public budget,

demonstrate the importance of further investigationsand audit procedures. These will form part of our workin the second phase.

Objectives of report

This report is addressed to the authorities of theHellenic Republic, but not onl to them. As mentionedpreviously, an objective of this report is to raise the

awareness of the Greek population, the internationalcommunity, and the international public opinion. In or-der to fulll this objectie, while remaining rigorous,the Committee decided to spare no eorts to mae thisdocument widely accessible to the public. This impliedin particular the need to remain concise; a documentof several hundred pages would not manage to achievethis objectie. But it also meant maing eorts to aoidobfuscation. We tr to explain our points in clear andnon-technical language, particularly as regards themore technical aspects. Onl in this wa can the Reportbe read by people without specialist technical knowl-edge, who however form the bulk of any society, andparticipate as they must in democratic deliberation. Itis exactly for this reason that some documents deal-ing with rather technical aspects or analysing in moredepth some e points presented in this Report will beposted online in their complete version.

Sources of documents and data

Ocial documents and data are essential in orderto reach the truth about the process of accumulationof Gree public debt. In order to fulll its mission, theCommittee used and analyzed the following documentsand data (non-exhaustive list):

■ Ocial documents such as contracts, treaties,agreements, programs, memoranda;

■ Annual reports of the ECB, Bank of Greece, HFSF;

■ Ocial statistics from Eurostat, ELSTAT, OECD, Banof Greece, Ministry of Finance, Public Debt Manage-ment Agency, European Commission;

■ Academic journal articles, research reports, andnewspapers;

■ Public hearings of witnesses;

■ Meetings with the authorities;

■ Criminal case le transmitted to the Hellenic Parlia-ment by the economic crime prosecutors (September– November 2012) concerning public statements of for-mer Gree representatie to the IMF, Mr. P. Roumeliotis.


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Definitionof termsIn this report, the following terms have the mean-ings respectively assigned to them hereunder:

Illegitimate debtDebt that the borrower cannot be required to

repay because the loan, security or guarantee, orthe terms and conditions attached to that loan, se-curity or guarantee infringed the law (both nationaland international) or public policy, or because suchterms or conditions were grossly unfair, unreason-able, unconscionable or otherwise objectionable, orbecause the conditions attached to the loan, secu-rity or guarantee included policy prescriptions that

violate national laws or human rights standards, orbecause the loan, security or guarantee was notused for the benet of the population or the debtwas converted from private (commercial) to publicdebt under pressure to bailout creditors.

Illegal debtDebt in respect of which proper legal proce-

dures (including those relating to authority to signloans or approval of loans, securities or guaranteesby the representative branch or branches of Gov-ernment of the borrower State) were not followed,or which involved clear misconduct by the lender

(including briber, coercion and undue inuence),as well as debt contracted in violation of domesticand international law or had conditions attachedthereto that contravened the law or public policy.

Odious debtDebt, which the lender knew or ought to have

known, was incurred in violation of democraticprinciples (including consent, participation, trans-parency and accountability), and used against thebest interests of the population of the borrowerState, or is unconscionable and whose eect is todeny people their fundamental civil, political, eco-nomic, social and cultural rights.

Unsustainable debtDebt that cannot be serviced without seriously

impairing the ability or capacity of the Govern-ment of the borrower State to full its basic hu-man rights obligations, such as those relating tohealthcare, education, water and sanitation andadequate housing, or to invest in public infrastruc-ture and programmes necessary for economic andsocial development, or without harmful conse-quences for the population of the borrower State

(including a deterioration in the living standards).Such debt is payable but its payment ought to besuspended in order to allow the state to full itshuman rights commitments.

AcronymsBIS: Bank for International Settlements

CDS: Credit Default Swap

CFR: Charter of Fundamental Rights

CJEU: Court of Justice of the European Union

COFOG: Classication of the Functions of Goernment

CRC: Conention on the Rights of the Child

DSA: Debt Sustainability Analysis

ECB: European Central Bank

ECHR: European Conention of Human Rights

ECSR: European Consortium for Sociological Research

ECtHR: European Court on Human Rights

ED: Executive Directors

EFF: Extended Fund Facility

EFSF: European Financial Stability Facility

EFSM: European Financial Stabilisation MechanismEIB: European Investment Bank

ELA: Emergency Liquidity Assistance

ELSTAT: Hellenic Statistical Authority

ESA95: European System of national and regionalaccounts

ESCB: European System of Central Banks

ESC: European Social Charter

ESM: European Stability Mechanism

EU: European Union

EURIBOR: Euro Interban Oered Rate

EWHC: High Court of Justice of England and Wales

GAO: General Account OceGDP: Gross Domestic Product

HFSF: Hellenic Financial Stability Fund

HRADF: Hellenic Republic Asset Deelopment Fund

ICESCR: the International Covenant on Economic, socialand cultural rights

ICJ: International Court of Justice

ICSID: International Centre for Settlement ofInvestment Disputes

IIF: Institute of International Finance

ILC: International Law Commission

ILO: International Labour Organization

IMF: International Monetary FundLTRO: Long-term Renancing Operation

NCB: National Central Bank

NSSG: National Statistical Service of Greece

OECD: Organisation for Economic Co-operation andDevelopment

OMT: Outright Monetar Transactions

PDMA: Public Debt Management Agency

PSI: Private Sector Involvement

SBA: Stand-By Arrangement

SDR: Special Drawing Rights

SMP: Securities Market Programme

TEU: Treaty on European Union

TFEU: Treaty on the Functioning of the European Union

VCLT: Vienna Convention on the Law of Treaties


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Greece’s public debt is a legac of past trends.This rst chapter analses the growth of theGree debt since the earl 1980s. Our mainndings are the following:

■ Rather than being a product of high public budgetdecits, the increase of debt was clearl related to thegrowth in interest payments. Greece entered the crisiswith a debt inherited over the period of debt accumu-lation of 1980-1993; the main contributor to debt ac-cumulation was the ‘snowball eect’ – present whenthe implicit interest rate on the debt is higher than GDPnominal growth. This explains two thirds of the increaseof debt between 1980 and 2007.

■ Public expenditure was lower than that of otherEurozone members. The only primary public spendingwhich was higher (as a ratio to GDP) was in defence ex-penditures, about which a series of corruption scandalsneed to be further investigated. The excessive spendingin defence constitutes €40 billion of the debt createdfrom 1995 to 2009.

■ Primar decits feeding the debt hae been fur-ther aected b poor performance in income tax col-

lection and emploers’ contributions to social securitcollection. These were much lower than the rest of Eu-rozone, and are attributed to fraud and illicit capitalows - explained below - beneting onl a minorit ofthe population. The cumulative losses due to these twotypes of income from 1995 to 2009 explain the remain-ing growth of debt.

■ Illicit capital outows prooed further tax ree-nue loss, amounting to €30 billion from 2003 to 2009.This was accompanied by lower amounts of spendingfor other expenditures, like social security, educationand R&D as compared to other EU countries.

■ Adopting the euro led to a drastic increase of pri-

vate debt, from 74.1% to 129.1% of GDP, to which majorEuropean private banks, as well as Greek banks, wereexposed. This provoked a banking crisis in 2009, whichtriggered the Greek sovereign debt crisis.

1. The growth of the debt: an overview

Three distinct phases can be observed in the evolu-tion of public debt between 1981 and 2009 (Figure 1.1):

■ 1981-1993: aer Greece joined the European Un-ion in 1981, we observe a strong increase of public debt,from 25% to 91% of GDP.

■ 1993-2007: quasi-stabilization from 91% to 103%of GDP. During this period, Greece enters into the Euro-zone in 2001 with a debt of 100% of GDP and a decit

close to 3%, which will be impugned in 20041

.■ 2007-2009: sharp increase from 103% to 113%

which, aer a contested2 statistical revision, jumps to127% of GDP, amounting to approximately €300 billioneuros.

FIGURE 1.1

Debt-to-GDP ratio 1980-2009The annual change in public debt is the addition of

three elements:

■ Primar budget balance: measured as the dier-ence between expenditures excluding interests pay-

CHAPTER 1

Debt beforethe Troika

SOURCE: AMECO

130

120

110

100

90

80

70

60

50

40

30

20

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009


12/6412

ments and scal reenues

■ Interest payments

■ Stoc-ow adjustment measured as the statisticaldierence between the change in the debt stoc andthe total annual decit

Once this decomposition is applied, as in Figure 1.2,the major role that interest payments play in increasingpublic debt is clear.

The debt-to-GDP ratio can be disaggregated intothree distinct elements:

■ Primary budget balance (in % of GDP)■ Stoc-ow adjustment (in % of GDP)

■ ‘Snowball eect’ (in % of GDP) which is positiewhen the implicit interest rate paid to service govern-ment debt is higher than the nominal GDP growth rate.

Table 1.1 below summarizes the contribution ofthese dierent factors to the change in the debt-to-GDP ratio. Between 1980 and 1993, the debt-to-GDPratio increased by 70.4 percentage points of GDP: the‘snowball eect’ contributed 58% to this change, cu-mulated primar balance b 32%, and stoc-ow adjustments by a further 10%. For the period 1993-2007,the contribution of the ‘snowball eect’ itself is higher

than the change in the debt-to-GDP ratio.

TABLE 1.1

Factors contributingto the debt-to-GDP ratio

This rst insight leads us to the following threeconclusions:

1. Prior to 2007, Greek debt was the main heir todebts accumulated during the period 1980-1993.

2. The snowball eect was the main contributor tothis change. This eect was triggered b high interestrates combined with a decrease in the exchange rateof the drachma.

3. Although scal decits were important, the werenot the main cause in the increase of the debt.

The results are summarized in Figure 1.3: between

1980 and 2007, the debt-to-GDP ratio increased by 82.3percentage points of GDP. Two thirds of this change(65.6%) is attributable to the ‘snowball eect’ and onla third (33.4%) to the cumulatie decits, includingstoc-ow adjustments.

FIGURE 1.3

Components of the Greek debt(% of GDP) 1980 - 2007

1. Contrary to what is frequently proclaimed, Greek

public expenditure (excluding defence) does not explainthe debt increase. Public expenditure was lower than inEuro Area countries (EA-11, which comprises Euro-Areacountries excluding Greece).

1980-

1993

1993-

2007

Changein the debt-to-GDP ratio

70.4 11.9

of which: ”Snowball eect” 40.6 13.5

Primary balance 22.4 -25.1

Stoc-ow adjustment 7.4 23.5

110

100

90

80

70

60

50

40

30

20

1980 1985 1990 1995 2000 2005

Cumulative deficits + Stock-flow adjustments

Snowball effect

+29.8pp GDP

+28.3pp GDP

+40.6pp GDP

+54.0pp GDP

FIGURE 1.2

The components of increasein debt (€ billion)

Primary budget balance

Stock-flow adjustment

Interest payments

Change in public debt

30

20

10

0

-10

1980 1990 20001985 1995 2005

SOURCE: AMECO


13/6413

FIGURE 1.4

Comparative evolution of totalgeneral government expenditure(1995-2005)

From 1995 to 2009 the average expenditure is lowerin Greece (48%) than in EA-11 (48.4%). Available dataindicate that Greece maintains a higher primary expend-iture only on defence spending, with Greece at 3% ofGDP, compared to the average of 1.4%. As a counter-factual scenario we estimate that if the percentage ofGDP devoted to defence spending was equal to the levelspent in EA-11, then the total public expenditure as ratioto GDP would have been lower in Greece than in EA-11countries until 2007.

We estimate that oerspending in defence contributedto a debt increase of at least €40 billion3. Most of thisspending is due to large-scale contracts for the purchaseof military equipment supplied by companies based incurrent creditor countries4. Concerns about illegal oper-ations, such as bribery, have been raised in several cases,particularly regarding excessive pricing or inadequacy ofthe equipment5. Greece’s current lenders lined the 2010bailout to the conrmation of pending militar purchaseorders, even though a part of this spending contributes tocommon EU defence objectives6, which should not, undernormal circumstances, have been paid by Greece alone.

The primar decits that contribute and feed thegrowth of public debt are mainly due to low levels of col-lection of public revenues. The taxes and social contri-butions collected aer 1999 decreased to leels close orlower than 34% of GDP, in contrast with a level of morethan 40% in the Eurozone countries.

FIGURE 1.5

Comparative evolution of totalcollection of taxes and socialsecurity contributions

As illustrated in Figure 1.5, the low levels of incometax collection and insucient actual contributions ofemploers to social securit explain the dierence be-tween pubic revenues in Greece and in the EA-18 coun-tries. The dierence is mainl due to fraud facilitated bcorrupt and inecient collection mechanisms, limitedand complacent sanctions for fraud and weak proce-

dures7

for recovering unpaid taxes and contributionsamounting to €29.4 billion at the end of 20098.

The debt that was contracted to compensate forlow levels of income tax collection represents €88 bil-lion during this period9. This increase in debt mainlybeneted a minorit of the population, as the majorit,77.5% of the population in 200910, which is dependenton wages or pension incomes, are on the whole relia-ble tax sources. Low tax collection is also attributableto unjust tax legislation which facilitates the legal taxevasion of privileged groups. The shortfall of revenuesattributable to insucient actual social contributionsof employers (rather than employees) represents €75

billion during this period.Corporate income tax reductions have contributed

to the decit, as corporate income tax has been pro-gressively reduced from 40% to 25% over the period.As a result, while in 2000 the contribution of this taxrepresented 4.1% of GDP (and 3% in EA-18), aer 2005it reached a level lower than EA-18 levels (2.5%) and1.1% in 2012.

2. Illicit capital outflows:

last but not least leak variable

The website LuxLeaks11 provides information on nineGree rms which beneted from “scal agreements”with Luxemburg. These are Babcoc & Brown, BAWAG,Bluehouse, Coca Cola HBC, Damma Holdings, Eurobank,Macquarie Group, Olaan Inestments Compan Estab-lishment and Weather Inestments.

Illicit capital outows are an een more radical wato evade taxes. To approximate their annual amounts,we used data from Global Financial Integrity12, a NGOwhich ealuates illicit outows as the dierence be-tween the nancial outows from a countr and theinows receied from that countr b the rest of theworld. As this methodology can only identify the mostisible part of nancial outows, its results must be

54

52

5048

46

44

42

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Greece

Euro Area (11 countries)

Greece with defence expenditures at EA11 level

SOURCE: EUROSTAT COFOG ESA 95

46

44

42

40

38

36

34

32

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Greece Total receipts

from taxes and social

contributions

Euro area (18 countries)

Greece with Income Tax

Collection at EA18 level

Greece with Income Tax &

Employers Social

Contributions at EA18

level


14/6414

considered as a lower bound13. The detailed data availa-ble for Greece show a cumulated outow of €200 billionbetween 2003 and 2009.

TABLE 1.2

Illicit financial outflows (€ billion)

SOURCE: GLOBAL FINANCIAL INTEGRITy14

To assess the impact of these illicit capital outows,we assume a moderate tax rate of 15% (half the actual).The shortfall for government revenue is therefore €30billion. With an appropriate legislation preenting illicitnancial outows, and fair taxation, the Gree publicdebt would have been (taking in account the interestpayments) €40 billion lower in 2009.

3. After the accession

to the euro area (2001)

The economic growth aer 2001 was mainl drienby a growth of consumption and led to an increase ofthe decit of the trade balance. The main trade part-ners of Greece hae beneted from the Gree economicexpansion of that period by increasing their exports toGreece. These exports included military equipment aswell as telecommunication equipment, some of whichare related to corruption and nancial scandals. Themost well-known are the cases of submarines, Leop-

ards tanks and Siemens procurement.

FIGURE 1.6

Balance of Tradein Goods and ServicesBalance of Trade in Goods and Servicesin € Billion

FIGURE 1.7 Greek imports after 2002Greek Imports of Goods in € Billion

SOURCE: EUROSTAT CN8

4. Low real interest rates provoked

increased exposures of Greek and Eu-

ropean banks to Greek private debt

As ination in Greece was higher than in the EuroArea aer 2001, the Gree public and priate borrowerscould oer attractie nominal interest rates to foreignnancial creditors attracting an inow of foreign capitalto both private and public sector. Important Europeanprivate banks, mainly French and German, have partic-ipated actively in the sharp increase of private loansin Greece, such as through the direct participation inGreek banks as in the case of Geniki and Emporiki. Therisks of creating a bubble through such an excessiveexposure where not adequately considered. This led toGDP growth rates being higher than in the rest of theEuro Area. During this period, the public debt to GDPratio remained relatively stable while the private debtto GDP increased fairly rapidly from 74.1% (2001) to129.1% (2009)15.

FIGURE 1.8

The sharp increase of privateloans given by Greek banks relied

on international finance

5

0

-5

-10

-15

-20

-25

-302000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

SOURCE: BANk OF GREECE ANNUAL BALANCE OFGOODS AND ANNUAL BALANCE OF SERvICES

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

16

14

1210

8

6

4

2

0

40

35

3025

20

15

10

5

0

Germany NetherlandsFrance

EU28 intra (right axis)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

300

250

200

150

100

50

0

SOURCE: BANk OF GREECE FINANCIAL ACCOUNTS

Loans to households and

non fnancial corporations

Liabilities to the rest of the

world

2003 2004 2005 2006 2007 2008 2009 2003-2009

41.2 31.8 0.0 33.0 53.1 2.8 40.5 202.5


15/6415

In 2009, with the beginning of the recession in theGreek economy, private Greek and foreign banks facedincreasing risks from non-performing private loans. Theforeign banks (essentially EU banks) had a high expo-sure to Greece (€140 billion), against public sector (45%),bans (16%) and the non-nancial priate sector (39%)16.

In 2009, Greek and foreign banks faced greaterrisks than Greece with regard to its sovereign debt17.The bailout of the Greek economy with public moneywithout a restructuring of public debt was an advanta-geous solution for foreign bans: it oered them timeto diminish, at a relatively low cost, their exposure atleast to Greek public and banking sectors. It was alsoan advantageous solution for the Greek banks, which di-minished their exposure to the public sector from €45.4billion in the 2nd quarter of 2009 to €23,9 billion the4th quarter of 201118. George Papandreou’s goernment

b emphasising and boosting the public decit and debtin 2009 helped to present elements of a banking crisisas a sovereign debt crisis (See Chapter 2). Frequent an-nouncements about a deteriorating situation provokedspeculation in Greek sovereign CDS, thus increasing –past the point of aordabilit - the interest rates re-quested to roll-over expiring Greek bonds.

Throughout this report we demonstrate how themajorit of the bailout loans gien to Greece aer2010, under strict conditionality, have been used forthe exclusie benet of priate bans, whether to re-imburse their holdings of government bonds or for therecapitalisation of Greek banks. Far from the frequentassertions that the loans “assist” or “aid” the popula-tion or the state their purpose paints an altogetherdierent picture; the priate nancial sector is theprimar beneciar from the Troia’s loans.

FIGURE 1.9

Foreign claims on GreeceBanks’ consolidated foreign claims on Greece(ultimate risk basis, € bn)

160

140

120

100

80

60

40

20

0

M a r . 0 5

M a r . 0 7

M a r . 0 9

M a r . 1 1

M a r . 1 3

M a r . 0 6

M a r . 0 8

M a r . 1 0

M a r . 1 2

M a r . 1 4

SOURCE: BIS; CONSOLIDATED ULTIMATE RISK BASIS. EA INCLUDES AT, BE, DE, ES, FR, IE, IT, NL

British banks

US banks

Euro area banks

SOURCE: BIS; CONSOLIDATED ULTIMATE RISK BASIS.

140

120

100

80

60

40

20

0

FIGURE 1.10

Foreign Banks’ exposure to GreeceBanks exposures to Greece (€ bn)

Dec.09 Dec.13Dec.11 Jun.14Dec.12 Dec.14

UK

US

ES

PT

NL

IT

IE

DE

FR

BE

AT


16/64

1. This concerns the SWAPS of Goldman Sachs aair andchanges in the treatment of military purchases used to lower

decits and debt in order to enter the Eurozone.2. This relates to discrepancies arising from illegalities in

debts certied and later incorporated that led to an increase ofthe debt. Notable examples are the enterprise debts, hospital

arrears, ambiguous treatment of Goldman Sachs’s swaps and

nall, operations leading to an underestimation of GDP.3. Ban of Greece, 2014. Annual Report 2013. Aailable at:

http://goo.gl/tvICPO [Accessed June 12, 2015].4. “SIPRI Militar Expenditure Database — www.sipri.org,” ac-

cessed June 13, 2015, http://www.sipri.org/research/armaments/

milex/milex_database. http://armstrade.sipri.org/armstrade/

page/values.php

5. Ibid .

6. For example, the defence of EU borders, NATO strategicplans (PATRIOT missiles and F-16) and NATO external operationsin Libya, Somalia and Eastern Mediterranean, see Milakas, 2012.

Debt and Military Spending. How They Sold Us “Trash” for “Gold”!

OnAlert .gr. Aailable at: http://goo.gl/DCrW4 [Accessed June 12,2015].

7. For example, more than 110.000 tax cases are pending

in the courts and approximately 5% of the amounts of cases judged are ever recovered. Ministry of Finance of Greece, 2015.

Statistical Data. Aailable at: http://goo.gl/y3rCu1 [Accessed June12, 2015].

8. kathimerini, 19.02.2015. Aailable at: http://goo.gl/42r6iO[Accessed June 2015 ]9 Calculation based on the dierence be-tween actual tax income and that which would have been re-

ceived if the average Eurozone rates were applied. Eurostat

COFOG – ESA-95.10. Op. Cit 7.

11. ICIJ, 2015. Explore the Documents: Luxembourg Leaks

Database. Aailable at: http://goo.gl/r707T4 [Accessed June 12,2015].

12. GFI, 2015. Global Financial Integrity. Available at: http://

goo.gl/djEv1n.

13. Economist Intelligence Unit, 2010. Countr Report: Greece;OECD, 2009. OECD Economic Sures GREECE. Aailable at:http://goo.gl/23QuX [Accessed June 12, 2015]; ELIAMEP, 2010.Economic Fact Sheet Greece 2009/10.

14. Op. Cit. 12.15. OECD, 2015. OECD Statistics. Aailable at: http://goo.gl/

i4sQSy [Accessed June 12, 2015].16. OECD, 2015. OECD Statistics. Aailable at: http://goo.gl/

i4sQSy [Accessed June 12, 2015].17. Including BNP, Société Générale and Crédit Agricole for

France (through its participation in Emporiki), Commerzbank,

Baden Bank, Postbank and DZ Bank for Germany and NBG, Ag-

ricultural Bank, Piraeus, EFG Eurobank, Hellenic Postbank and

Alpha for Greece.

18. Bank of Greece, 2015. Financial Accounts. Available at:

http://goo.gl/JW85TX [Accessed June 12, 2015].

16


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As the economy started to deteriorate in2008, the Greek banking system was con-fronted with a solvency crisis. The main ob-

jectie of the rst loan agreement of Ma2010, amounting to €110 billion, was to rescue bankswith exposure to Greek public debt. The loan allowed

for European and Greek banks to reduce their exposureto Greek bonds, transferring the risk to multilateral andbilateral creditors. As the economy shrank as a conse-quence of austerity measures, imposed in an attemptto serice debt, the scal situation continued to dete-

riorate leading to an increase in the debt to GDP ratio.The second agreement, which involved additional

loans amounting to €130 billion and a haircut of 53.5%

of the face value of Greek bonds, worsened the cri-sis. Among the losers of PSI were public entities whichsuered losses of €16.2 billion. Most of these lossesaccrued to pension schemes, with losses of €14.5 billion.

In stark contrast, Greek banks were fully compensatedwhile private foreign creditors were partly compensat-ed on the losses induced by the haircut through the useof “sweeteners”.

The management of the crisis was a failure as aresult of the fact that it was approached as a sovereigndebt crisis when reality it was a banking crisis.

1. From 2009 to May 2010

The snap elections on October 4 of 2009 signaledone of the biggest ictories of PASOk during the lastdecades, gaining 43.92% of the otes. PASOk owed thisictor to its pre-election promises. With the famousphrase “we have money”, proclaimed during a rally inrural Greece, the leader of PASOk won the elections.PASOk promised a new period of increased redistri-bution of wealth, tackling the social problems of the“generation of 700 euro” and protecting the most vul-

nerable. Nonetheless, just a few wees aer the elec-tions, a series of substantial revisions of statistical data[see box] too place. As a result, the political climatechanged sharply.

The Greek crisis arose from the fragile position of theGreek banking system, demonstrated through the high

degree of leverage of the banking sector as a whole.The dependence on short term funding of the bankingsector created signicant liquidit issues, as well as sol-enc concerns, which eentuall led in October of 2008for the government of K. Karamanlis to provide an aidpackage of aid to the banks amounting to €28 billion.

From this amount, €5 billion were provided to ensurecompliance with banking capital requirements. Therest of the resources were promised in the form of

guarantees. As it can be obsered in gure 2.1, therst increase in the soereign ris spread too placein this moment, long before G. Papandreou ocialldeclared the exclusion from the markets of the coun-try in the spring of 2010.

FIGURE 2.1

Greece Government Bond 10YImplied Yield on 10 Year Bonds

Between the end of 2009 and the beginning of 2010,the continuous announcements of new austerity meas-

ures (i.e. spending cuts) and downgrades of Greece byrating agencies marked the betrayal of the pre-election

CHAPTER 2 Evolution of the

Greek public debtduring 2010-2015

SUMMARY

5.6

5.4

5.2

5.0

4.8

4.6

4.4

4.2

1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009

SOURCE: TRADING ECONOMICS.COM | PUBLIC DEBTMANAGEMENT AGENCy POMA


18/6418

Aer the Parliamentar Elections of 2009 (4/10/2009), the

newly elected government of G. Papandreou illegally revisedand increased both the public decit and debt for the periodbefore the memorandum of 2010. As it will be shown, Euro-

pean authorities collaborated with the new government in the

process of irregular and successie increases in the ocialstatistics for the public decit and debt.

Hospital liabilitiesThe public decit estimation of 2009 was increased

through seeral reisions: the public decit as a share of GDPincreased from 11.9% in the rst reision to 15.8% in the last.

One of the most choing falsication examples of the publicdecit is related to the public hospitals’ liabilities.

In Greece, as in the rest of the EU, suppliers traditionallyprovide public hospitals with pharmaceuticals and medical

equipment. Due to the required invoice validation proce-

dures required by the Court of Audit, these items

are paid aer the date of delier. In Septem-ber 2009, a large number of non-validated

hospital liabilities for the years 2005-2008

was identied, een though there was not aproper estimation of their alue. On the 2ndof October 2009, within the usual Eurostatprocedures, the National Statistical Service of

Greece (NSSG) sent to Eurostat the decit anddebt notication tables. Based on the hospital

survey traditionally carried out by the NSSG, theseincluded an estimate of the outstanding hospital liabilities

of €2.3 billion. On a 21st of October notication, this amountwas increased by €2.5 billion. Thus, total liabilities increased

to €4.8 billion. The European authorities initially contested this

new amount given the unusual circumstances under which it

took place suspicious procedures:

“In the 21st October notication, an amount of €2.5 billionwas added to the goernment decit of 2008 on top of the€2.3 billion. This was done according to the Greek authorities

under a direct instruction from the Ministry of Finance, in spite

of the fact that the real total amount of hospital liabilities is

still unnown, that there was no justication to impute this

amount only in 2008 and not in previous years as well, andthat the NSSG had oiced its dissent on the issue to the GAO[General Account Oce] and to the MOF [Ministr of Finance].This is to be considered as a wrong methodological decision

taen b the GAO”.1

Howeer, in April 2010, based on the Gree goernment’s“Technical Report on the Reision of hospital Liabilities”(3/2/2010),2 Eurostat not onl gae in to Greece’s new goern-ment demands about the contested amount of €2.5 billion, but

also included an additional €1.8 billion. Thus, the initial amount

of €2.3 billion, according to the Notication Table of the 2nd ofOctober 2009, was increased to €6.6 billion, despite the factthat the Court of Audit had only validated €1.2 billion out of the

total. The remaining €5.4 billion of unproven hospital liabilitiesincreased the public decit of 2009 and that of preious ears.

These statistical practices for the accounting of hospital

liabilities clearl contraene the European Regulations ESA95

(see ESA95 par. 3.06, EC No. 2516/2000 article 2, Commission

Reg. EC No. 995/2001) and the European Statistics Code ofPractice, especially regarding the principles of independenceof statistical measurements, statistical objectivity and reli-

ability.

It is important to highlight that a month and a half aerthe illegal increase of the public decit, the Ministr of Financecalled the suppliers and asked them to accept a 30% discount

on the liabilities for the 2005-2008 period. Thus, a large part

of hospital liabilities was never paid to pharmaceutical sup-

pliers by the Greek government, while the discount was never

reected in ocial statistics.3

Public corporations

One of seeral falsication cases concerns 17 public corpo-rations (DEkO). ELSTAT4 and Eurostat, transferred the liabil-

ities of the 17 DEkO from the Non-nancial Corporationssector to the General Government sector in 2010.

This increased public debt in 2009 by €18.2 billion.

This group of corporations had been classiedas Non-nancial corporations aer Eurostathad eried and approed their inclusion inthis category. It is important to emphasize

that there were no changes on this issue in the

ESA95 methodology between 2000 and 2010.

The reclassication too place without car-rying out the required studies; it also took place

oernight aer the ELSTAT Board was dispersed. Inthis way the president of ELSTAT was able to introduce the

changes without questions from the Board members. Thus, the

role of the national experts was completely ignored, inducing

a conict with the ESA95 Regulations. Consequentl, the insti-tutionall established criteria for the classication of an eco-nomic unit into the General Government sector was infringed.5

Goldman Sachs swaps

Another case of unsubstantiated increase of public debt

in 2009 is related to the statistical treatment of swaps with

Goldman Sachs. The one-person ELSTAT leadership increased

the public debt by €21 billion. This amount was distributed adhoc over the four year period between 2006 and 2009. This

was a retroactie increase of Greece’s public debt and wasdone in contradiction of EC Regulations.

In total, it is estimated that as a result of these technically

unsupported adjustments, the budget decit for 2009 wasincreased by an estimated 6 to 8 percentage points of GDP.

Likewise, public debt was increased by a total of €28 billion.

We consider the falsication of statistical data as directlrelated to the dramatization of the budget and public debt

situation. This was done in order to convince public opinion in

Greece and Europe to support the bail-out of the Greek econ-

omy in 2010 with all its catastrophic conditionalities for the

Greek population. The European parliaments voted on the “res-cue” of Greece based on falsied statistical data. The baningcrisis was underestimated by an overestimation of the public

sector economic problems.

Falsification of public deficit and public debt


19/6419

promises of the new government. This paved the wayfor the deterioration of the scal situation that allowed,under an “emergency situation”, to approve further in-

jection of public resources to re-capitalize Greek banks.

These measures quelled the expansion of the crisis to

other European bans, eectiel transferring the bur-den of the crisis to the Greek taxpayers.

The new austerity measures that the government ofGeorge Papandreou announced in February and March2010 accelerated the deterioration of public nances.As a result, the yields of Greek bonds increased. The

Greek government declared the loss of market accessand ociall requested, on April 23rd, the support ofother Eurozone members and the IMF, following the

decision of the European Summit on March 25. The

situation was dramatized, although there were otheralternaties to coer the nancing gaps of the 2010budget such as:

■ Restructuring of the baning sector, in a similarvein to the measures taken in Scandinavian countriesin the 90’s and Iceland in 2008.

■ Increase domestic borrowing.

■ Bilateral loans from non-euro countries.

■ Buy-back of Greek bonds from secondary market.

■ Accepting more of the €25 billion oered in thelast auction of 2010 when the government sought to

borrow.

■ Other alternaties include the cessation of pa-ments and cancellation of debt.

TABLE 2.1

Issuance of government bonds2009 - 2010

SOURCE: PDMA, ISSUANCE CALENDAR & SyNDICATION AND

AUCTION RESULTS.

2. The Memorandum

of Understanding of May 2010

The rst loan agreement of €110 billion (€80 billionfrom the Eurozone countries and €30 billion from the

IMF) was accompanied by what the President of the

ECB, Jean Claude Trichet, described as “strict condition-

alities”6. The program focused, namely, on three “keychallenges”: First, to restore condence and scal sus-tainabilit through a front-loaded scal eort, second,to restore competitiveness through reforms like wageand benet cuts, and third to safeguard nancial sectorstability.7

In realit, the aim of the rst loan was to oer a safe

emergency exit to private bondholders that wanted toreduce their exposure to Greek bonds, in a context in

which the likelihood of nominal haircuts on the value ofthe bonds was signicantl high.

FIGURE 2.2

Consolidated BIS-reportingBank Claims on Greece

end-2009, percent of total claims

SOURCE: BIS CONSOLIDATED BANk STATISTICS AND IMFSTAFF ESTIMATES

The exposure of foreign banks to Greek public andprivate debt is recognized as the key reason behind the

unwillingness of debt-

ors to apply an earlyhaircut on bonds: “Theexposure of Frenchbanks to Greece was

€60 billion, whereasGerman’s was €35billion euro worth8; if

they were obliged totake steep losses ontheir Greek papers

– and on their oth-er euro governmentbond holding as well –the nancial sstem’sviability would come

under a huge cloud”9.Hence, its possible toargue that the first

loan agreement and the MoU were designed to rescue

the private creditors of the country, specially banks, andnot Greece.

3. From May 2010 to February 2012

As a result of the refusal of creditors to agree on ahaircut of Greek bonds, sovereign debt since the end of2009 until the end of 2011 increased from €299 billion

to €355 billion. This is an increase of 18,78%. More

A U C T I O N

D A T E

M A T U R I T Y

D A T E

C P N

A M O U N T

A U C T I O N E D

A M O U N T

O F F E R E D

A M O U N T

A C C E P T E D

10 YEAR BOND 11-Mar-09 19-Jul-09 6,00% 7.5 11.7 7.5

5 YEAR BOND 07-Apr-09 20-Aug-14 5,50% 7 10.5 7

3 YEAR BOND 05-May-09 20-Mar-12 4,30% 7.5 13.8 7.5

10 YEAR BOND 10-Jun-09 19-Jul-09 6,00% 8 20.6 8

5 YEAR BOND 02-Feb-10 20-Aug-15 6,10% 8 25 8

10 YEAR BOND 11-Mar-10 19-Jun-20 6,25% 5 16.145 5

32%Other

European

banks

11%Non-European

banks

36%French banks

21%German banks


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importantl, there was a dramatic change in the proleof the debt. Due to the massie sell o of Gree bondsby European and Greek banks, public debt privately heldwas transferred to other Eurozone member states andthe IMF. The share of bonds in the total Greek debt de-creased from 91.1% in 2009 to 70.5% in 2011, while theshare of loans increased from 5.2% in 2009 to 25.3%in 2011.10

In 2010 and 2011 the unprecedented recession (con-traction of GDP of 4.9% and 7.2% respectively) led toa failure in the achieement of nearl all the scal tar-gets (from tax revenues to the reduction of the budgetdecit). In the meantime, the increasing popular angeragainst austerity led to a political crisis.

Starting from February 2011, the Troika began to askfor additional spending cuts and measures. This was aclear indication that the rst Memorandum was quiclbecoming out-dated. On October 26, 2011 the Coun-cil of the European Union decided a new program forGreece, amounting to €130 billion of additional loans.This represented an increase in the value of a previousoer presented in Jul 2011, which amounted to €109billion. In the framework of a European Summit, thevoluntary participation of private bondholders to takea aproximately 50% haircut in the nominal value of thebonds was proposed. A modied ersion of this propos-al, called PSI+ (Private Sector Involvement), material-

ized under the second loan agreement.

4. The PSI

The progressive change in the composition of thedebt paved the way for a restructuring process with theparticipation of private bondholders. The restructuringof Greek debt was completed on March 9 through theexchange of bonds with new ones bearing a haircut.The total amount of debt prior to the exchange wasreduced in February 2012 by €106 billion. This decreasefailed to reduce the debt burden of the country as a newloan agreement totalling €130 billion was settled. Thisamount included an initial allocation of €48 billion to be

destined for bank recapitalization. It is clear then thatthis loan agreement was also designed to protect andminimize the losses of the nancial sector. It is not acoincidence that the negotiations that took place duringthe winter of 2012, which led to a “happy end” for thecreditors, were headed b ocials of the Institute ofInternational Finance and its then managing directorand ex-banker Charles Dallara.

Among the biggest losers of PSI+ were public enti-ties and small bondholders. With the adoption of twolaws, the deposits of hundreds of public entities suf-fered losses of a total value of €16.2 billion. Most ofthe losses were imposed on pension schemes, total-

ling €14.5 billion (from a total of capital reserves of€21 billion). These losses had no impact on the totalamount of outstanding debt because of their intergov-ernmental nature of this debt. Another group, which

registered signicant losses, were the small bondhold-ers. It is estimated that more than 15.000 families losttheir life savings. This was a result of the fact that formany years sovereign bonds were promoted and soldas a zero-risk form of saving. The unequal distributionof losses opened a social wound, as highlighted by the17 suicides that have been recorded to date amongthose who lost their savings11. The injustice is madeevident if we compare the refusal of the PSI+ schemeto compensate this small group of bondholders, whileat the time providing full compensation to Greek banksand the provision of “sweeteners” to foreign banks.The social impact of the PSI+ was augmented as aresult of the draconian and punitive terms that accom-panied it (cuts in salaries, privatizations, dismantlingof the collective bargaining system, mass redundan-cies of public employees, etc). In addition, the issueof the new bonds under British and law (which makesits restructuring with a sovereign decision much moredicult) undermines soereign rights to the benetof creditors.

The neutral impact on Greek debt of the 2012 re-structuring on debt sustainability became evident verysoon. In the summer 2013 the same promoters of PSI+,who initially advocated for it as a permanent solutionof the sovereign debt crisis, where issuing calls for anew restructuring.

5. From 2012 to 2015

The restructuring of the Greek debt was completedin December 2012 when the ECB implemented a buyback of Greek bonds. This reduced the debt further.Nevertheless, this buy back at a price of 34 cents pereuro allowed some hedge funds, like Third Point of DanLoeb, to generate he prots in a short space of timemaking $500 million12.

During the period of the “Greek rescue” (2010-2014)sovereign debt experienced its biggest increase and gotout of control, increasing from €299.690 billion, 129.7%of GDP, to €317.94 billion, 177.1% of GDP. In the mean-

time the share of bonds decreased from 91.12% in 2011to 20.69% in 2014 and the share of loans increasedfrom 5.21% in 2009 to 73.06% in 2014. In particular,the EFSF’s loans constituted 68.4% of the oerall Greedebt. The totall ineectie character, in an economicsense, of the two loan agreements was proved in 2015during the discussions for a new restructuring of thedebt. The need for restructuring is a result of the factthat “the two support programmes for Greece were acolossal bail-out of private creditors”13.

Setting aside the specic causes of the unsustaina-bility of Greek debt, it is notable that a substantial in-crease in sovereign debt took place all over the world in

the aermath of the 2007 crisis. According to the IMF,general government debt between 2008 and 2014 in-creased from 65% of GDP to 79.8% globaly, from 78.8%to 105.3% in advanced economies and from 68.6% to


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94% of GDP in the Euro area14. Sovereign debt was awa for the priate nancial sector to pass the costsof the crisis of 2007 onto the public sectors across theworld.

1. European Commission, 2010. REPORT ON GREEk GOvERN-MENT DEFICIT AND DEBT STATISTICS. Available at: http: //goo.gl/

RxJ1eq [Accessed June 12, 2015].2. GREEk GOvERNMENT, 2010. Technical report on the rei-

sion of hospital Liabilities.

3. Ministr of Health and Social Solidarit, 2010. Press Release.4. In March of 2010, the oce in charge of ocial statistics,

the National Statistical Service of Greece (NSSG), was renamed

as ELSTAT (Hellenic Statistics Authority).

5. Among a plethora of breaches of European Law, the follow-

ing iolations are especiall and brie described: The criterion ofthe legal form and the type of state involvement; The criterion

of 50%, especially the requirement of ESA95 (par. 3.47 and 3.48)

about subsidies on products; This violation lead to false charac-

terization of revenue as production cost; The ESA95 (par. 6.04)

about xed capital consumption; The Regulations about CapitalInjections; The ESA95 denition about the goernment-ownedtrading businesses (oen referred to as public corporations) asnot belonging to the general government sector; The ESA95 re-

quirement of a long period of continuous decits before and aerthe reclassication of an economic unit.

6. “Loans are not transfers, and loans come at a cost. They

come not onl at a nancial cost; the also come with strict con-ditionality. This conditionality needs to give assurance to lenders,

not only that they will be repaid but also that the borrower will beable to stand on its own feet over a multi-year horizon. In the case

of Greece, this will require courageous, recognisable and specicactions by the Greek government that will lastingly and credibly

consolidate the public budget” ECB, 2010. Keynote speech at the

9th Munich Economic Summit. Available at: https://www.ecb.eu-

ropa.eu/press/e/date/2010/html/sp100429.en.html [Accessed June 12, 2015].

7. IMF, 2010. Greece: Sta Report on Request for Stand-BArrangement, IMF Countr Report No. 10/110. Aailable at: http://goo.gl/ErBW0Q [Accessed June 12, 2015].

8. Bastain , C., 2012. Saving Europe: How National Politics

Nearl Destroed the Euro, Washington DC: Brooings InstitutionPress. Aailable at: http://goo.gl/Hv22X [Accessed June 12, 2015].

9. Blustein, P., 2015. LAID LOW THE IMF, THE EURO ZONE AND

THE FIRST RESCUE OF GREECE, CIGI PAPERS NO. 61 — APRIL2015. Aailable at : https://goo.gl/lRkFE [Accessed June 12, 2015].

10. Hellenic Republic, Ministr of Finance, State Budget, ar-ious years.

11. Belegrinis, Y., 2014. Petty Bondholders: The people who

trusted the Greek State and were destroyed, December 5, 2014

Hungtonpost. Aailable at: http://goo.gl/hQcjBp [Accessed June12, 2015].

12. This hedge funds had bought those bonds at a price of 17

cent a euro. Armitstead, L., 2012. Dan Loeb’s Third Point hedgefund maes $500m prot from Gree bonds. The Telegraph. Aail-able at: http://goo.gl/cwI7J [Accessed June 12, 2015].

13. The Eiel Group and the Glienicer Group, 2015. GiingGreece a chance | the Eiel Group and the Glienicer Group at

Bruegel.org. Bruegel. Aailable at: http://goo.gl/DlACRo [Accessed June 12, 2015].14. IMF, 2015. FISCAL MONITOR—NOW IS THE TIME: FISCAL

POLICIES FOR SUSTAINABLE GROWTH. Aailable at: http://goo.gl/0CvwFw [Accessed June 12, 2015].


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T

he institutions that created the Troika are

the main creditors to Greece, and as agroup they apply tremendous pressure to

secure their repayment. This chapter lays

out the basic set of relevant issues that the Com-

mittee wants to highlight looking at the main current

creditors - the EU member states, the EFSF, the IMF,

the ECB and priate creditors. We present the con-

tentious nature of these debts, delineating their key

characteristics, which are further analysed in Chap-

ter 8. The majority of the loans received from the

bailouts were used to repay existing debts. Approx-

imately 10% of the bailout programme was used to

nance the budget, as shown in Table 3.1.

TABLE 3.11

Use of official funding,2010 to 2015

TABLE 3.2

Public debt of Greeceby component, as of 30/04/152

TOTAL %

Official Funding

Received243.2 100.0%

Amortization

(exc. Short term debt)112.5 46.3%

Bank recapitalization 48.2 19.8%

PSI related costs 34.5 14.2%Other 23.4 9.6%

Budget Balance 24.6 10.1%

ITEMMILLIONSOF EUROS

%

T-Bills 14,943.9 4.8%

Bonds 39,380.1 12.6%

Bonds held by Euro-

pean Central Banks

(ANFA)

7,309.3 2.3%

Bonds held by ECB

(SMP)19,874.1 6.4%

Loans from Bank of

Greece4,265.0 1.4%

Special and bilateral

foreign loans (EIB)7,094.5 2.3%

Other Foreign Loans 5,081.0 1.6%

Loans from EFSF 130,909.1 41.9%

Bilateral loans from

Eurozone member

states

52,900.0 16.9%

Loans from IMF 20,634.6 6.6%

Short-term loans(REPOS)

10,286.9 3.3%

TOTAL 312,678.5

CHAPTER 3

Greek public debtby creditor in 2015


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1. Bilateral Loans■ The pooled bilateral loans were set up in May

9 of 2010 and disbursed over six quarterly tranches.

Total disbursements amounted to €52.9 billion3 .

TABLE 3.3

Composition of BilateralLoans to Greece(millions euros)

■ The bilateral loans are put into eect throughthe combination of the Intercreditor Agreement and

the Loan Facility Agreement, as described in Chap-

ter 4. It was declared that initiating these loans with

a high interest rate would act as an “incentive to

return to market-based nancing as soon as fea-

sible”4.

■ As a result of this policy choice €2,614 billionof interest payments were made to the member

states by March 20125. Set at the variable rate of

3-month Euribor plus 300 basis points extra charge

for the rst three ears6, the original rates were

onerous. With the Euribor rate peaking at 1.609%in August 20117 the interest on the bilateral loans

reached over 4.6%. As some of the creditor coun-

tries’ borrowing costs were lower than the lending

rate,8 some lenders proted out of the loans. The

gradual easing of the loans’ terms9, currently at Eu-ribor + 50 basis points is an implicit admission that

the original terms were usurious.

■ The loans were portrayed as if used to assistGreece in paying wages and pensions. Indicative

of this portraal is Eurogroup president Juncker’s

statement that disbursements are used to recapi-

talise banks, pay wages, pensions and government

suppliers.10

This is however misleading. The bilateralloans were used primarily for debt repayment: be-

tween May 2010 and September 2011 86% of the

loans were used solely for debt repayment.11 The re-

mainder was not even used in its entirety for budget

support, but rather to pay for the setting up of the

Hellenic Financial Stability Fund. 12

2. EFSF

■ The EFSF, based in Luxembourg, was created in2010 to presere nancial stabilit in Europe13. None-

theless, by creating additional debts for individualmember states, the scheme deteriorated the econom-

ic situation for Europe as a whole and especially forGreece.

■ EFSF loans are nanced through the issuanceof funding instruments, which are backed by guaran-tees of euro-area member states. Guarantees were in-

creased from €440.00 billion in 2010 to €779.78 billionin 201114. By 2013, Portugal, Greece, Ireland and Cyprus

had stepped out from the EFSF changing the guaran-tees of the EFSF to €724.47 billion, which remains the

current commitment15. As the number of highly rated

guarantors of the fund dwindles, as occurred aer

France’s downgrade, so too does the stabilit of theEFSF. Eventually the scheme was replaced by the ESM.

■ The EFSF disbursed €141.8 billion of which €10.9was returned on the 27th February 2015, leaving€130.9 billion debt to Greece16. From the total disbursed

amount, €108.2 billion (76.3%) was disbursed in 2012,€25.3 billion (17.8%) in 2013, and €8.3 billion (5.9%)

in 2014. The repayment of these loans will stretch to2054.

■ The interest rates of EFSF loans are calculatedon the following basis: Greece pas the EFSF nancingcost plus 10 basis points guarantee fee. For each loandisbursement, there is an additional loan disbursement

fee of 50 basis points. The countr nances EFSF acti-ities, bearing all of its costs, even if for whatever reason

the disbursement of the Pre-Funding Operations doesnot tae place. This scheme has imposed signicantcosts for Greece17 and the amount paid as ‘serice fee’between 2012 and 2014 totaled €740 million18. PSI-re-

lated debts, for a time, incurred interest, but since 2014all EFSF interest payments are deferred until 2023.

■ Onl a small share of the loans contributed to thegoernment’s regular expenditure19. The bailout wasdisbursed mainly in EFSF securities: notes worth €34.6billion subsidized the PSI, €11.3 billion notes were used

in the ‘Debt bu bac’ and €37.3 billion has been cur-rently borrowed for the Greek banks.

■ The majority of the EFSF bailout was disbursed‘in ind’, not in euros. Cashless operations constitute65.4% of total EFSF loans20. As elaborated in Chapter 4,

the EFSF facilitates an exchange of obligations, mean-ing that the loans are, on the whole, not designed to

enter Greece, but rather be used directly, inter alia, forthe repayment of debts.

3. IMF

■ The European Parliament and the IMF acknowl-edge that the IMF programme results were “uneven”

and contained “notable failures”21

. This is a gross un-derestimation of the extent of the deceit towards theGreek people.

■ Concrete negotiations surrounding the size and

Germany (KfW) 15,165.3

France 11,388.6

Italy 10,007.5

Spain 6,649.9

Netherlands 3,193.7

Belgium 1,942.5

Austria 1,555.0

Portugal 1,102.4

Finland 1,004.0

Ireland 347.4

Slovenia 243.5

Luxembourg 139.9

Cyprus 109.6

Malta 50.6

TOTAL 52,899.9


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type of the loan between the IMF and Greece had be-gun from March 201022. First Deputy Managing Direc-tor, Lipsky, assured the Greek representative to theIMF that the Greek loan size would be decided bythe Board on a political basis, rather than calculatedaccording to the quota allowance23. The Stand-ByAr

Greek Govt Report: The Truth Committee on Public Debt (Debt Truth Committee)

Documents

Transcript of Greek Govt Report: The Truth Committee on Public Debt (Debt Truth Committee)